Duty of care: how to respond adequately to the new credit standards

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Duty of care: how to respond adequately to the new credit standards

Is your organisation prepared for a potential new wave of locked up customers?

On 1 April, an adapted method to calculate credit standards will be introduced to ensure more responsible lending. This will impact your acceptance policies, processes and current customer portfolio. In this article, we inform you on how to prevent, detect and act upon locked up customer situations as part of your duty of care.

New credit standards

On 1 April, an adapted method to calculate credit standards will be introduced by the Vereniging van Financieringsondernemingen and the Nederlandse Vereniging van Banken. This method aims to ensure more responsible lending and to contribute to better financial health of consumers. These standards are applied by lenders to determine their borrowing capacity of consumers. In practice, by using this more precise method, this will result in a considerably lower borrowing capacity. Naturally, this will have an impact on your acceptance policies and processes, but it can also impact the current customer portfolio. A tightening of credit norms also affects the capability of existing customers to take out a loan for the same amount elsewhere. In other words, chances are that the number of locked up customers will rise as well. These new developments are the reason why it is vital to reassess the locked up policy and its execution within your organisation. Does the organisation have adequate measures in place to handle locked up customers? Can your organisation detect and prevent customers from getting into unmanageable debt? Now is the time to assess and take action.

What is locked up?

As mentioned above, locked up customers are unable to refinance their (revolving) credit to a suitable alternative offered by another credit provider. A distinction is sometimes made between customers who are locked up due to an indexation of credit standards or due to changed personal circumstances. There is no explicit legal definition that provides clarity to the locked up scope. From a customer-centric point of view applying a broader scope would prevail. Therefore, both underlying causes would be reason to mark these customers as being locked up. Because of the lack of clear (legal) guidelines on the topic, the market struggles with the approach towards locked up customers. A number of pivotal elements are highlighted below.

How to prevent customers from becoming locked up?

Preventing customers from becoming locked up starts with a customer-centric view and approach. This extends beyond applying the credit standards mentioned before. Every relevant part of your organisation should be aimed at preventing vulnerable customer situations. This does not only involve lending processes, but also pivotla pillars such as strategy, fair pricing and ensuring customer situations don’t further deteriorate by raising interest rates for already locked up customers. For instance, this should be supported by having a supportive culture and an adequate product approval &review process in place. There is a whole field of organisational aspects that can help to prevent vulnerable customer situations, but that can also deteriorate their positions.

How to detect locked up customers?

It is essential to actively monitor and timely recognizes that any changes in the clients situation, behaviour or other circumstances, might arise which can result in customers becoming locked up. If these changes are recognized in time, it is easier to swiftly help customers in these vulnerable situations. For monitoring a risk-based approach can be used. For example, by implementing a risk controlled actualisation model to continuously monitor the consumer's withdrawal and redemption behaviour (including high utilisation percentage or substantial deviating withdrawals), and life events such as retirement and divorce (for which a change of address can be an indicator). We see many firms are taking steps in this area, but it can be challenging to determine which parameters can be an indicator for signs of locked up customers. Additionally, monitoring is too often focused solely on credit risk instead of duty of care risks. Taking this into account, and implementing an adequate risk-based monitoring, should be the basis of a sound locked up policy.

How to act on locked up customer situations?

When a suspicion of a potentially locked up situation arises, it is essential (and mandatory) to contact the customer in order to gain insight in their current financial situation. If the customer does not respond to a request to update the client profile, it is a credit provider’s duty of care to prevent an increasing vulnerability. In order to do so, the withdrawal option must be blocked until there is proof that the credit is still suitable. However, additional measures will be needed to create a sustainable solution. For instance, concessions in terms of duration and interest, but also softer measures such as budget coaching. It is important to realize that there is no one-size-fits all approach when it comes to locked up customers.

More information

The stricter credit standards are expected to bring a new wave of locked up customers. To stay ahead of this development, you can prepare your organisation with an integral approach on pivotal duty of care aspects. Taking action on these topics will result in a long-term sustainable customer relationship and a responsible business environment. Based on Deloitte's extensive experience in the field of duty of care we can assist you. If you would like to know more, please contact Wendy or Christiaan via their contact details below.

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